Can I Cash In My Pension?
Before going any further, it is important to define some terms here. Why? Because the phrase 'cashing in a pension' means different things to different people. How you use the terms really dictates whether what you plan to do is financially advisable. Consider the following terms:
- Pension Liberation – Pension liberation is a strategy of gaining access to your pension funds, prior to age 55, for the purposes of transferring the money to a different scheme or putting it into qualifying investments. It incurs no penalties as long as no money is taken directly by the saver as cash.
- Pension Release/Unlocking – These terms are used to describe schemes in which consumers are offered early access to their pensions that will provide a cash lump sum and/or other investment opportunities that are ostensibly more lucrative. This type of scheme is often fraudulent and can result in excessive penalties or total loss of a pension pot.
- Cashing In – This term is usually reserved for accessing pension funds at age 55 or later, without any penalties assessed. It is the strategy we will be referring to throughout the remainder of this post.
Should you be contacted by someone offering to liberate, release, or unlock your pension prior to age 55, be extremely cautious. Your best bet would probably be to hang up the phone without any further discussion. However, if you are interested in learning more, be sure to verify all of the information you are given through second and third opinions from certified financial advisors. Moreover, by no means should you accept any sort of lump sum cash payment prior to age 55.
Any time a consumer chooses to cash in a pension, the question of unauthorised payments must be addressed. An unauthorised payment is any payment that does not fall under the government guidelines for accessing pension funds without penalty. Examples of unauthorised payments include, but are not limited to:
- Lump sums taken prior to age 55
- Lump sums from smaller pots that don't meet trivial commutation rules on Defined Benefit Schemes
- Certain kinds of payments received by your survivors upon your death.
Though the Government has changed some of the rules regarding the third payment in our list, those that still fall under their original designations are charged a penalty of 55%. If you were to take an unauthorised payment of £1,000 from your pension pot, the Government would send you a tax bill of £550. As you can see, taking unauthorised payments is seldom a good idea.
We cannot talk about unauthorised payments without also mentioning pension scams. The Pensions Regulator continually warns consumers to be very wary of opportunities to cash in pensions that seem too good to be true. If something sounds too good to be true, it likely is. Here is an example of a scam that could end up costing you dearly:
You receive an unsolicited phone call from a self-professed investment advisor offering to provide you better returns on your money by transferring your current pension fund to an account focused on international real estate opportunities. The individual promises you astronomical returns and, as a bonus, a lump sum payment of 25% of your pension fund. He even goes so far as to tell you that the rule changes allow you to take that 25% tax-free.
The first thing to consider is your age. If you are not yet 55, any lump sum payment you receive will automatically be subject to the government penalty. If the remainder of your pension funds do not go into a qualifying investment, they will also be subject to the penalty.
If you are at least 55 years old, you will not have to worry about the penalty charges. However, you could lose a significant portion of your pension pot if the overseas investments offered to you are either illegitimate or poor performing. Either scenario could realistically wipe out all of the money you saved in one fell swoop.
As a rule, you should never entertain pension advice from someone who offers it to you unsolicited. Your safest practice is to seek out a certified financial advisor yourself – someone who is willing to sit down with you and answer all of your questions without obligation.
We hope you are not scared away from the legitimate options you have just because there are fraudsters in the world. Can you cash in a pension and lose everything? Sure. Nevertheless, you can also do it the right way and enjoy some great benefits. It is simply a matter of knowing both the rules and the basics of investing.
As we have already mentioned, you can cash in a pension beginning at age 55 without any penalties. You simply contact your pension administrator to inform them of your plans. They will make all the arrangements. Keep in mind, there will likely be some charges involved to cover your administrator's expenses. Some of those charges could be significant, so make sure you know what they are beforehand.
Completing the transaction will subject your pension monies to income tax. You pay no tax on the first 25% and your marginal rate on the remaining 75%. This is important. That 75% taxable portion is considered income in whatever year you collect it. You may push yourself into a higher tax band as a result of cashing in. It all depends on the value of your pot at the time you take it.
Once you have the money, you can do whatever you want with it. Here is a short list of some of your options:
- Savings – You may choose to cash in your pension and put the money into a savings account. This is not a wise idea with interest rates as low as they are, but you could do so if you wanted to.
- Current Account – You may also choose to put all of the money in your current account to be used as regular, monthly income. Assuming your current account enjoys a better return than savings, this would be a better option. Yet you can still do even better.
- Stocks – Some pension savers are very comfortable with the idea of putting their money into the stock market. This is a high risk/high reward proposition that could earn significant returns if you play it right. Nonetheless, you really have to know what you are doing to make good money in stocks.
- Other Equities – In addition to stocks, you could invest in other equity options. Of course, there are always the options of commodities, precious metals, and currency as well.
- Property – Residential property investing has been one of the most stable investments since the mid-1990s. It is now more attractive than ever thanks to low interest rates and the stamp duty overhaul. Cashing in your pension for the purposes of investing in rental property could provide you with substantial returns.
To you detect a trend here? The main purpose for cashing in a pension rather than purchasing an annuity or accepting a drawdown is to take your money and invest it in a strategy that you believe will bring you a greater return on your money. Without the possibility of earning a better return, there would be no point to cashing in unless you needed the money for something else.
Along those lines, some people are forced to cash in so that they can pay medical bills or retire some form of high interest debt that is ruining their finances. We hope that you are not in that kind of position. If you are, you may be able to cash in a pension early without incurring penalties. Check with a financial advisor for the details.
Have you been asking yourself, “Can I cash in my pension?” If so, you will be pleased to know that it is possible. As always, please do not make any pension decisions without first receiving proper advice from a regulated financial expert. Your financial future depends on you making wise decisions.
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